What Does it Mean When You’re “Under Water?”

A phrase that many newspapers and alarmist news programs have been bandying about is “under water.” If you’re like most homeowners, you understand it’s a bad thing but you don’t know exactly what it is. What does it mean to be under water, and what can you do about it?

What Does it Mean to be Under Water?

The term “under water” as it applies to a home mortgage means that you owe more money on your mortgage than your home is currently worth. This has become an increasing problem for homeowners as home values have plunged in some parts of the country throughout the recession. Homeowners who purchased a home at the height of the housing market may now owe hundreds of thousands of dollars more on their mortgage than their home is worth. Alternately, homeowners who refied at the peak of the housing market boom may now be stuck with more debt than their home is worth.

Consider someone who purchased a home for $500,000 in 2005, and that home is now worth only $325,000. The homeowner owes more money than the home is worth, and the mortgage is considered “under water.”

What Can You Do if You’re Under Water?

If you’re under water, you’re essentially limited to two options: hanging onto your home, or pushing for a short sale. If you can afford it, you should hold onto your home and hope that housing prices will climb again, and that you will eventually go back to owing less than your home is worth. But if you can’t afford to hold onto your home, you may ask the bank about pursuing a short sale.

Some banks will let you sell a home for less than the mortgage amount if the alternative is you defaulting entirely. But banks have very specific requirements for short sales, so you must be able to demonstrate your financial need. Alternately, some government programs have offered relief for underwater homeowners; contact your lender to find out if you qualify for any of these programs.